Acquiring Equipment – The Options

Legal and Financial Considerations

There are three basic options for acquiring equipment: buying it, leasing it, or leasing it under a finance lease. Each option has its own set of advantages and disadvantages.

• Buying the Equipment: Ownership is transferred to the lessee, providing significant legal rights. However, there are no payments to offset if the equipment malfunctions, and warranties are often limited.

• Leasing the Equipment: Lessee does not own the equipment but can stop payments if it malfunctions. No large initial outlay of money is required, but the lessee must continue making payments regardless of equipment performance.

• Finance Lease: A triangle transaction involving a vendor, leasing company, and lessee. Payments are made to the leasing company, and the lessee takes possession of the equipment. The lessee must continue paying regardless of equipment performance, and there are no warranties or other rights to enforce against the leasing company.

Tax and Exit Strategy Considerations

Leasing equipment can be advantageous for tax purposes, especially for larger acquisitions. Additionally, the exit strategy for selling a business can be simplified with proper leasing arrangements, as the buyer may assume the lease with the lessor's permission, or the seller can pay off the loan using their sale proceeds.

Complexities and Risks

The distinctions between these transactions can be blurred, and some transactions that call themselves "leases" may be viewed as "disguised sales" by a judge. Additionally, the distinction between leases and sales can be different depending on the jurisdiction, with some transactions being viewed as sales in the eyes of the Bankruptcy Court judge.

Professional Advice

When considering leasing equipment, it's beneficial to consult with your accountant and/or lawyer. Equipment salespeople are incentivized to close deals, and thorough financial analysis and advice should be sought before committing to a lease or finance lease.